Telecommunications & Electronic Media

A La Carte Regulation of Pay TV: Good Intentions vs. Good Economics

By Jeffrey Eisenach & Adam Thierer*

I
n his insightful works on political economy, Professor
Thomas Sowell warns of the dangers of lawmakers allowing
good intentions to trump good economics when crafting
public policy. It is a theme which Friedrich Hayek,1 Milton
Friedman2 and others articulated before him, of course, but
Sowell has more fully developed this cautionary principle in
books like A Conflict of Visions and The Vision of the Anointed.
Sowell teaches us that noble intentions alone do not necessarily
translate into sound public policy, and cautions against the
hubris that leads policymakers to believe that they can easily
improve on market outcomes. Even the best-intentioned
policies can spawn unintended consequences, giving rise to still
more regulatory interventions as policymakers seek to rectify
past mistakes.
The Federal Communications Commission (FCC) would
be wise to heed Sowell’s advice in the ongoing debate over “a la
carte” regulation of cable and satellite television networks and
programming. The notion—giving consumers the right to pay
for only the cable TV channels they want, without having to
purchase a full bundle—is highly appealing on the surface, and
well-intended advocates on both sides of the political divide,
including the Consumer Federation of America’s Mark Cooper
and FCC Chairman Kevin Martin, are no doubt acting out of
the best of intentions. But a closer look suggests that a la carte
regulation would be a classic case of what we refer to as Sowell’s
Law of Wishful Thinking. Indeed, it would likely have the exact
opposite effects of what its proponents intend, leaving consumers
and families worse off than they are today.
I. Today’s Pay TV Marketplace
On the face of it, the pay TV marketplace appears to be
functioning efficiently. By any conceivable statistical measure,
consumers today have access to more video outlets and options
than at any time in history, and 86% of Americans subscribe to
cable, satellite or telco-provided television services.
Certainly there is no shortage of programming. Indeed,
the long-heralded “500-channel” cable universe is now a reality.
The overall number of video programming channels available
in America has skyrocketed, from just seventy channels in 1990
to 565 channels in 2006.3 The resulting diversity “on the dial”
has been astounding . There is hardly any human interest or
hobby that is not covered by some video network. As the FCC
concluded in its 2003 Media Ownership Proceeding, “We are
moving to a system served by literally hundreds of networks
serving all conceivable interests.”4 Exhibit 1 below shows the
sheer diversity of programming on pay TV today.

Cable and Satellite TV Programming Options

News: CNN, Fox News, MSNBC, C-Span, C-Span 2, C-Span 3, BBC America
Sports: ESPN, ESPN News, ESPN Classics, Fox Sports, TNT, NBA TV, NFL Network,
Golf Channel, Tennis Channel, Speed Channel, Outdoor Life Network, Fuel
Weather: The Weather Channel, Weatherscan
Home Renovation: Home & Garden Television, The Learning Channel, DIY
Educational: The History Channel, The Biography Channel (A&E), The Learning Channel,
Discovery Channel, National Geographic Channel, Animal Planet
Travel: The Travel Channel, National Geographic Channel
Financial: CNNfn, CNBC, Bloomberg Television
Shopping: The Shopping Channel, Home Shopping Network, QVC
Female-oriented: WE, Oxygen, Lifetime Television, Lifetime Real Women, Showtime Women
Family / Children-oriented: Animal Planet, Anime Network, ABC Family, Black Family Channel, Boomerang, Cartoon Network, Discovery
Kids, Disney Channel, Familyland Television Network, FUNimation, Hallmark Channel, Hallmark Movie Channel, HBO Family,
KTV – Kids and Teens Television, Nickelodeon, Nick 2, Nick Toons, Noggin (2-5 years), The N Channel (9-14 years), PBS Kids Sprout,
Showtime Family Zone, Starz! Kids & Family, Toon Disney, Varsity TV, WAM (movies for 8-16-year-olds)
African-American: BET, Black Starz! Black Family Channel
Foreign / Foreign Language: Telemundo (Spanish), Univision (Spanish), Deutsche Welle (German), BBC America (British), AIT: African
Independent Television, TV Asia, ZEE-TV Asia (South Asia) ART: Arab Radio and Television, CCTV-4: China Central Television, The
Filipino Channel (Philippines), Saigon Broadcasting Network (Vietnam), Channel One Russian Worldwide Network, The International
Channel, HBO Latino, History Channel en Espanol
Religious: Trinity Broadcasting Network, The Church Channel (TBN), World Harvest Television, Eternal Word Television Network
(EWTN), National Jewish Television, Worship Network
Music: MTV, MTV 2, MTV Jams, MTV Hits, VH1, VH1 Classic, VH1 Megahits, VH1 Soul, VH1 Country, Fuse, Country Music
Television, Great American Country, Gospel Music Television Network
Movies: HBO, Showtime, Cinemax, Starz, Encore, The Movie Channel, Turner Classic Movies, AMC, IFC,
Flix, Sundance, Bravo (Action, Westerns, Mystery, Love Stories, etc.)

148 Engage: Volume 9, Issue 2

 Not only is programming
diverse, so, too, is the universe
of programmers. While the FCC
and cable industry critics have
often expressed concern about
vertical integration between cable
operators on the one hand and
programmers on the other, the
reality is that vertical integration
in the video marketplace has
plummeted. Since 1990, the
number of cable-owned or
affiliated channels has increased
only slightly, while the number
of independently-owned and
operated video networks has
exploded. Thus, as shown in
Exhibit 2 (top), the percentage
of cable channels owned and
operated by cable operators has
dropped from 50% in 1990 to
just 14.9% today.
Competition is also
growing on the program
delivery front. While local
cable operators were once
monopolies, competition from
satellite, cable overbuilders,
and, most recently, telephone
companies like AT&T and
Verizon is cutting deeply
into cable’s market share. As
shown in Exhibit 3 (bottom),
competition in the program
delivery market is increasing
rapidly.
Growing competition is
not only offering consumers
more choice, but also increased
quality. Cable, satellite, and
telephone companies have
invested hundreds of billions
of dollars in recent years to
provide more channels, digital delivery, video-on-demand, and, people could choose not to buy certain channels, they would no
most recently, high-definition. As the FCC itself concluded in longer be forced to subsidize programming (particularly “racy”
its most recent report on the video programming marketplace, programming) of which they disapprove. Thus, an a la carte
“competition in the delivery of video programming services mandate is presented as both economic regulation, designed
has provided consumers with increased choice, better picture to reduce prices, and social regulation, designed to “clean up
quality, and greater technological innovation.”5 the airways.”
Given these results, what is the case for regulation? II. A La Carte as Economic Regulation
Proponents of an a la carte mandate suggest that they can
improve on the market in two primary ways. First, since people The economic case for an a la carte mandate rests on two
would no longer be forced to pay for channels they do not premises. First, it is argued, cable prices are rising faster than
watch, they would pay less for cable television. Second, since inflation, and government action is therefore appropriate to
give consumers lower prices. Second, a la carte regulation would
................................................................... reduce the prices people pay for cable programming. Neither
* Jeffrey Eisenach is Chairman of Criterion Economics and Adam Thierer premise withstands scrutiny.
is a Senior Fellow with the Progress & Freedom Foundation.

June 2008 149

 If cable prices were rising faster than inflation, there might
well be a strong political (though not an economic) case for
regulation. Indeed, much of the case for a la carte has been
premised on this notion, with advocates pointing, for example,
to the most recent FCC report on cable prices, which shows
that the average price paid for the basic tier of cable channels
rose 93% over the ten-year period between 1995 and 2005,
compared with the consumer price index, which increased only
28%. But there are two problems with this data.
First, the FCC’s data is three years old. More recent
data from the Bureau of Labor Statistics shows that cable
price increases have moderated and, indeed, that cable prices
in 2007 and 2008 have actually risen less rapidly than the
Consumer Price Index (CPI). Perhaps this change is due
to increased competition, or to efficiencies associated with
the increasing ability of cable companies to spread the fixed
costs of their infrastructures over multiple services, such as
broadband and telephony. Whatever the reason, cable price
increases have slowed, and the political case for regulation has
thus weakened.
The second problem with the price increase argument is
more fundamental, and ultimately more important: the price
increase figures cited by a la carte advocates fail to account for
changes in quality, which can be captured by taking into account
either the number of television channels included in the basic
tier or the time people spend watching cable TV. When cable
prices are looked at in terms of the price per channel, the real
price of pay television has fallen throughout the past decade.6
And because television viewing overall is increasing, and cable’s
share of viewing hours is also going up (relative to over-the-air
TV), the price paid per viewing hour has actually declined even
in nominal terms.7 Thus, the basic underlying political argument
for economic regulation of cable is, to be blunt, a lie: by the
most accurate measure, cable prices are not only not rising faster
than inflation, they are actually going down!
Most people would agree, of course, that rising prices—
even if they were rising—would not by themselves constitute
a basis for regulation. Rather, regulation should be considered
only if a case can be established for market failure—in which
case it might be possible, at least in theory, for regulation to
improve on the market outcome and lead to lower prices in the
long run. But a la carte advocates have failed to demonstrate
that bundling constitutes a market failure of any sort.
Bundling is, course, pervasive throughout the economy,
and while the economics of bundling are complex, economists
universally agree that it is generally efficient and beneficial
to consumers. Bundling improves economic efficiency in a
variety of situations, including when there are economies
of scope and scale. One particularly significant and relevant
efficiency motivation, advanced many years ago by Nobel
Prize winner George Stigler,8 occurs when there are high fixed
costs of production and consumers have differing preferences
for various “flavors” of a product. A simple example illustrates
the point.9
Suppose there are two cable TV channels, “sports” and
“business,” each of which costs $10 to produce. Suppose further
that there are two consumers, one of whom is willing to pay $7
for the sports channel and $4 for the business channel, while
150
the other is willing to pay only $4 for sports, but will pay $7
for business. If the two channels are offered separately, there
is no price at which demand will be sufficient to cover cost: if
each is offered for $10 (its cost), no one buys either channel;
if each is offered at $7 and is purchased by one consumer,
revenue is $7 and each channel loses $3; and, if each is offered
at $4 and purchased by both consumers, revenue is $8, and
each channel loses $2. In short, in an a la carte world, neither
channel is produced.
If bundling is permitted, on the other hand, the two
channels can be offered together for $10, and both consumers
(each of whom values the two channels at a total of $11)
will purchase. Revenues are now $20, covering the costs of
both channels, and each consumer receives $1 in consumer
surplus.
This argument is only one of several that explain why
bundling of cable TV channels is economically efficient.
Bundling also provides a means for cable channels to expand
their distribution, thereby increasing advertising revenues (and
defraying costs that would otherwise be passed on to consumers
in the form of higher subscription fees); it allows consumers
to sample cable channels, thereby reducing marketing costs;
and, it reduces transactions costs by avoiding the need for
cable operators to constantly add and subtract channels from
individual consumers’ feeds.10
Economists also recognize that bundling can, in certain
(very limited) circumstances, be a sign of market power, and a
la carte advocates have suggested this is the case in cable TV.11
But they have failed miserably to prove their case. Indeed, as
noted above, competition in pay TV is growing: virtually
all consumers now have a choice among at least one cable
TV provider and two satellite providers, and many can also
choose to get their service from cable overbuilders or telephone
companies. If a la carte was an economically efficient business
model, we would expect to see at least some of the firms in a
competitive market to offer it voluntarily, yet none have done
so.
Back in 2004, when the FCC first considered (and
rejected) a la carte regulation, a group of respected economists
wrote to the agency’s Media Bureau warning that the proposal
would not achieve its purported objectives. Their conclusion:
“(1) mandatory a la carte distribution would very likely raise
overall prices; (2) consumers’ viewing decisions would very
likely be distorted and their ability to sample alternative
networks and shows would very likely be suppressed; and
(3) mandatory a la carte distribution would very likely harm
new and niche networks, which would result in fewer viewing
options for consumers.”12
In short, when it comes to a la carte, the economics of cable
TV are clear: Rather than reducing prices and increasing choice,
as proponents hope, it would do precisely the opposite.
III. A La Carte as Social Regulation
A la carte proponents point to another supposed benefit
of regulation: it could help “clean up” the character of pay TV.
Many policymakers have expressed a desire to extend content
controls to cable and satellite TV, but realize that direct efforts
to regulate subscription-based media platforms would likely
be held to be in violation of the First Amendment.13 A la carte
Engage: Volume 9, Issue 2
regulation has been pitched by some of those lawmakers as an
indirect method of accomplishing that same objective.14 But
will it really work? It is highly unlikely, at least in the fashion
many lawmakers and family groups hope for.
The reason is two-fold. First, as made clear above, a la carte
regulation threatens the wonderful diversity of programming on
television today. That also explains why a la carte proponents
are wrong when they suggest that it would “clean up” pay
TV and allow us to purchase just the “good stuff.” The “good
stuff” is not likely to survive in a world of mandatory a la carte
regulation. Most family-focused/children’s networks, female-
oriented channels, and religious programmers oppose a la carte
mandates for this reason. They understand that their programs
attract only a small subset of the overall universe of viewers. If
their networks are not bundled alongside other channels, they
might disappear entirely. Colby May, director of the Faith
and Family Broadcasting Coalition, which represents religious
broadcasters, last year called a la carte regulation “a dagger
aimed at the heart of religious broadcasting in America,” and
predicted that it would “decimate religious broadcasting and
the wholesome, family-oriented programming carried on niche
cable channels.”15
Second, the channels that some lawmakers want driven
off basic cable—MTV, F/X, Comedy Central, Spike, and so
on—will likely continue to do just fine. They are all among
the Top 20 networks on cable and satellite TV today and have
a strong following on DVD and the Internet. Even under a
new regulatory regime, people will still flock to these networks
in fairly large numbers.
So the “choice” consumers will be left with in a world
encumbered by a la carte regulation is one of fewer choices of
television programming. If smaller, niche-oriented networks
begin to disappear, lawmakers will be dismayed obviously, but
they will be absolutely furious if the channels that they really
wanted to see vanish end up surviving anyway.
Again, wishful thinking cannot change the basic rules of
markets and economics. Policymakers might like to see “racy”
programming disappear and “family” programming rule the
“airwaves,” but imposing a la carte regulation would likely have
precisely the opposite effect.16
CONCLUSION
From a policy perspective, a la carte regulation is worse
than a solution in search of a problem; it is a problem waiting
to happen. As prices rose and programming became less
diverse in the wake of an a la carte mandate, policymakers
would find themselves besieged by consumers and interest
groups demanding yet another “solution.” Perhaps they would
frankly admit error and reverse course, repealing the misguided
policy they had so recently put in place. On the other hand,
it is just possible that they would proffer still more regulatory
solutions—price controls, for example—which would be
politically attractive on the surface, but equally flawed in their
underlying economics. No doubt the new rules would also be
motivated by the best of intentions.
June 2008
Endnotes
1 See generally F.A. Hayek, The Fatal Conceit, ().
2 See generally Milton Friedman, Capitalism and Freedom ().
3 “FCC Adopts 13th Annual Report to Congress on Video Competition and
Notice of Inquiry for the 14th Annual Report,” Fed. Commc’ns Comm’n,
Press Release, Nov. 27, 2007, at 3, http://hraunfoss.fcc.gov/edocs_public/at-
tachmatch/DOC-278454A1.pdf.
4 Fed. Commc’ns Comm’n, In the Matter of 2002 Biennial Regulatory Re-
view – Review of the Commission’s Broadcast Ownership Rules and Other Rules
Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, FCC
03-127, June 2, 2003, at 48-49, http://hraunfoss.fcc.gov/edocs_public/at-
tachmatch/FCC-03-127A1.pdf.
5 See Fed. Commc’ns Comm’n, In the Matter of Annual Assessment of the Sta-
tus of Competition in the Market for the Delivery of Video Programming, Twelfth
Annual Report, MB Docket No. 05-255 (Mar. 3, 2006), at ¶5.
6 See, e.g., Jeffrey A. Eisenach & Douglas A. Trueheart, “Retransmission
Consent and Cable Television Prices,” The CapAnalysis Group, LLC ( March
2005).
7 See Steven S. Wildman, Assessing Quality-Adjusted Changes in the Real Price
of Cable Service, Mich. St. Univ. (Sept. 10, 2003).
8 George J. Stigler, A Note on Block Booking, in The Organization of In-
dustry ().
9 For a more complete discussion, see Jeffrey A. Eisenach & Richard Lud-
wick, The FCC’s Further Report on A La Carte Pricing of Cable Television, The
CapAnalysis Group, LLC (March 6, 2006).
10 For an excellent discussion of the economic efficiency rationales for cable
bundling, see Federal Communications Commission, Report On the Packag-
ing and Sale of Video Programming Services to the Public (December 2004)
at 20-26.
11 For example, Chairman Martin has suggested that bundling might con-
stitute an illegal “tying” arrangement. Ted Hearn, Martin: Expanded Basic a
Tying Arrangement, Multichannel News, Sept. 14, 2006.
12 Joint Economists Letter to Kenneth W. Ferree, MB Docket 04-207, No-
vember 4, 2004.
13 See Adam Thierer, “Thinking Seriously About Cable and Satellite Censor-
ship: An Informal Analysis of S. 616, The Rockefeller-Hutchison Bill,” Progress
& Freedom Foundation Progress on Point no. 12.5, Apr. 2005, http://www.pff.
org/issues-pubs/pops/pop12.6cablecensorship.pdf; Robert Corn-Revere, “Can
Broadcast Indecency Regulations Be Extended to Cable Television and Satel-
lite Radio?” Progress & Freedom Foundation Progress on Point 12.8 (Progress
and Freedom Foundation May 2005), http://www.pff.org/issues-pubs/pops/
pop12.8indecency.pdf.
14 See, e.g., Chairman Martin’s remarks at “Open Forum on Decency,” in
the Senate Commerce Committee in November 2005 (http://hraunfoss.fcc.
gov/edocs_public/attachmatch/DOC-262484A1.pdf ) as well as his com-
ments on Capitol Hill on June 14, 2007 applauding the introduction of an
a la carte legislative proposal (http://hraunfoss.fcc.gov/edocs_public/attach-
match/DOC-274169A1.pdf ).
15 “Religious Broadcasters Oppose FCC Chairman’s Call for Pay-Per-Chan-
nel Legislation,” Press Release, Faith and Family Broadcasting Coalition, April
17, 2007, http://www.ncta.com/DocumentBinary.aspx?id=575. The late the
Rev. Jerry Falwell also opposed a la carte regulation for the same reason, saying
“Though well-intentioned, the fact is that a la carte would threaten the very
existence of religious broadcasting and the vital ministry conducted over the
television airwaves.” Quoted in Ted Hearn, “Falwell’s 11th Commandment:
No a La Carte,” Multichannel News, Nov. 17, 2004, http://www.multichannel.
com/article/CA481169.html.
16 The better approach would be to encourage the continued development
of even more family-friendly and educational fare and then let parents sim-
ply block those channels they do not desire with the parental control tools
available in every set-top box today. That’s a win-win strategy that demands
no further regulation of pay TV markets while ensuring parents access to an
expanding array of enriching programming for themselves and their children.
See Adam Thierer, “Parental Controls and Online Child Protection: A Survey
of Tools & Methods,” Progress & Freedom Foundation Special Report, Version
3.0, Spring 2008, http://www.pff.org/parentalcontrols.
151